Window Dressing the Financial Statements

An employee, Fauzi, working in the accounts office of a medium-sized company listed on the BursaMalaysia, was working late one evening during the week. He realised he had left his pen in the boardroom at an earlier meeting and, given its value, went upstairs to look for it. As he approached thedoor,he heard the followingdiscussion:

"Chief Executive: I am deeply concerned that if this fall in profit figures is disclosed in the next annual report, there will be all sorts of problems with the shareholders. We may even losea number of biginvestors.

Non-executive director (also the cousin of the Chief Executive): (large sigh) Well, I suppose we could always find a way of making them look better.

Chief Executive: How? I can't see it at all.

Non-executive director:Well, we could make them just slightly higher than last year's figures by including theproceeds of the sales of our toothbrush division.

Chief Executive: But the sale doesn't go through until October.

Non-executive director: No, but it will ... and it doesn't make much difference, we need the money on the books now.

Chief Executive: But when the accounts are signed off, won't that be fraudulent?

Non-executive director: Not really ... I don't see why ... it's just a manipulation of timing rather thannumbers.

Chief Executive: OK. That sounds good to me. Lets sort it out now."

Fauziheard oneof them move towards the door, and quickly slipped back tothe stairs. He left work and spent the evening worrying about what he should do, if anything. He decided he would anonymously ask the Company Secretary how he could deal with this situation, and bring the issue out into theopen.

1.As Company Secretary,you receive a report from the employeeabout the overheardconversation.

Write summary for boardmembers of the corporate governance problems raised by this employee, and the weaknesses in the company's corporate governance which are evident from the conversationwhichwasoverheard.

2.Explaintwo (2)unethical issues in the conversation.

3.Draft a whistleblowing policy statement fortheorganization.

4.Discuss the criticisms which have been made concerning the effectiveness ofnon-executive directorsas control mechanism in the company.

5.Recommendtwo (2)improvementswhich arenecessary